This post was updated at 8 p.m. ET Oct. 17 with a comment from MusclePharm.
A sports supplement company owned in part by legendary bodybuilder, movie star and former-California Gov. Arnold Schwarzenegger is being investigated by the Securities and Exchange Commission.
Arnold Schwarzenegger (Photo credit: Wikipedia).
MusclePharm -- which makes an array of fitness supplements and sponsors Ultimate Fighting Championship -- was issued a formal order of investigation by the SEC looking into “internal controls, disclosures of related party transactions, settlements of claims including share issuances, executive compensation, and disclosure of perquisites,” according to a Sept. 30th filing.
A company spokesman said MusclePharm was unable to comment on the SEC inquiry, but later provided the following statement, "This investigation has absolutely nothing to do with Arnold Schwarzenegger and is totally unrelated to Mr. Schwarzenegger."
Although Schwarzenegger is the largest common shareholder of the Denver, Colo.-based company with an 8.8% stake worth about $7.2 million, he only acquired the shares in July after forming a partnership with MusclePharm. Public filings show that Schwarzenegger reached an agreement with the company to endorse MusclePharm products, including a “special Arnold Schwarzenegger product line of between 4 and 8 products,” in exchange for royalties off the products and 780,000 common shares. There’s no indication that the investigation relates to Schwarzenegger, as MusclePharm suggests, especially given the recency of their relationship.
The company, founded in 2008, is run by founder and CEO Brad Pyatt, who owns 5.8% of the common shares, worth $4.8 million), but controls 31% of all voting shares. Pyatt did a short stint with the Indianapolis Colts in the early 2000s, and unfortunately hasn’t had much personal or business success financially since then. The company states in its annual report that Pyatt has suffered a personal bankruptcy and other failed business ventures, acknowledging that this could “expose us to assertions by others that our management team may not know how to effectively run a business.” Court records show he completed the Chapter 7 bankruptcy proceedings in March 2010.
Their plan to neutralize this liability included installing other savvy and established businessmen on the board, including Jeremy DeLuca, who built the wildly successful online supplement distributor Bodybuilding.com with his brother Ryan. But even DeLuca and Bodybuilding.com have had some trouble in the past. The DeLucas pleaded guilty in May 2012 to misdemeanor charges for selling misbranded supplements tainted with illegal steroids, settling for a fine and three years probation.
MusclePharm (Photo credit: Wikipedia)
Whether the presence of more successful businessmen around Pyatt has demonstrably aided MusclePharm isn’t clear. Its financial track record isn't impressive thus far, and the "executive compensation" that is part of the SEC investigation does raise some red flags. The company posted revenues of $48 million through the first two quarters of 2013 -- an increase from $32 million last year -- but they’ve struggled with profitability. They’ve posted small net losses and negative free cash flow during almost all reporting periods. But executives have still been paid handsomely. In total compensation (including stock awards), Pyatt and Executive Vice President Corey Gregory were paid $5.6 million in 2010, while the company only pulled in $3.2 million in revenue. That appears to have been remedied ab it in the most recent fiscal year, with Pyatt and Gregory earning a combined $822,000 on $67 million in sales in 2012.
The company is trading on the OTC market at $9.25 per share, but has applied to be listed on NASDAQ.
In positive news, just this week the company announced its Combat Protein Powder was shipping to all Costco locations across the U.S. -- another optimistic development on top of securing Schwarzenegger’s endorsement this summer.
But will the action star, whose movie “Escape Plan” is now in theaters, soon be looking for an exit strategy of his own and terminate the relationship with MusclePharm?
